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Wednesday, June 19, 2013

What Is The Better Business Model Social Casino Or Internet Gambling?

There has been much focus placed on the enticing possibilities of converging social casino and Internet gambling  for the purpose of increasing revenues for social game companies and decreasing the cost of player acquisition for Internet gambling businesses. The underlying implications of this merger is that the two models are better off merged and the social casino business is best utilized as an acquisition tool for online gambling businesses. 

A contrarian view is that both models are better off focusing on their core businesses and acquiring and monetizing players in their respective silos.  This strategy implicitly acknowledges that these business are inherently different in terms of players, acquisition costs, markets, etc. and perhaps the cross over of the two models is  not worth the effort because the business operations and players are very different.

A further inherent assumption is that social casino as a standalone business is inferior to a "real" online gambling business. The revenue per player in online gambling stands out as the primary reason for the presumed superiority of this model over the social casino model. Social game operators in particular are intrigued by the large bets that online gamblers sometimes wager and also loss to gambling operators. They are also  fascinated by the relative low number of players(with the exception of poker) required to generate a profit in a gambling business.

Conversely, online gambling companies are envious of the ability of social casino companies to operate gambling style games in an unrestricted and unregulated way. They are also amazed that a no payout  gambling model works so well and attracts so many players. People actually put money into blackjack, slot machine games, etc. without any hope of receiving an actual payout?? 

So , what is the superior model assuming that there is no cross over or conversion of players in either direction?

The answer to this question lies in the ratio of cost to revenue and the inherent risk or lack there of in each of the business models. Potential future growth in each sector is also a factor in determining a superior business model because with growth comes future potential increases in revenue.

Internet Gambling Model - The Internet gambling model is now an ancient model that has not changed fundamentally since the advent of regulation in Europe. The legal Internet gambling model is essentially a European business model operating for about 20 years. In the last few years the model has changed a bit with the emergence of a country  by country regulatory model. This model has changed the cost/revenue ratio and has resulted in decreased revenue and viability of liquidity based gaming models such as poker and in some cases bingo.

A number of things make the Internet gambling business a challenge to operate cost effectively and to grow in terms of players and revenue.  The country by country model significantly increases the cost of operation and player acquisition costs  resulting in consolidation of gambling businesses. Essentially, the Internet gambling model has followed the classic trajectory of a maturing industry with very few new businesses entering the space.   This also means that competition within the sector decreases and the surviving businesses form a pseudo monopoly in the marketplace.

For the surviving Internet gambling businesses the business model is actually a very good model because they can begin to negotiate hard with existing vendors because there are so few alternative. Also, players have very few choices and will be forced to play on the few properties that still exist. Innovation in the business decreases because there is no need to innovate so existing employees and platforms can remain relatively unchanged. However, revenue growth is hard to manage and is essentially related to population growth of the legal aged gambling public.

If the the United States or any other major market opens in the future the small number of existing European Internet gambling operators will most likely take the lions share of those markets providing the regulatory regime is identical or  essentially the same as the European model. This will be the future growth opportunity for the gambling sector and a reason why existing gambling operators are spending so much time and effort to get into the US market.

Social Casino Model - The social casino model is obviously very different. There is no regulation in the sector, social casino games are played by people all over the world, the number of players concurrently playing social casino games completely dwarfs the numbers that Internet gambling host.

Social casino games are constantly evolving with fierce competition for existing and new players. This sector will produce all kinds of hybrid games that mix standard casino style game mechanics with features from other gaming sectors such as virtual worlds and video games. Game features change at a moments notice based on player behaviour and monetization of players.

The fact that social casino's take a players money and never make a single payout to them for their winnings is definitely an envious business model when compared to the situation with online gambling. This enigma also results in less investment in fraud control and cheating or colluding. It also makes it easier to obtain payment processing options because the risks are low for them providing there is not a high default rate on credit card charges made to buy chips that can never be redeemed.

The one possible risk to the free form nature of the social casino model is the threat of regulating this industry if there is an actual or perceived relationship between social casino play and traditional Internet gambling. This subtle yet important point could and would change the economics of this business resulting in only players within a certain age group having access to these games.

In conclusion, there are pros and cons to both business models. There is still far more opportunity in social casino to react to the marketplace, create new game content, enter new world markets and take players from other games. However, the association between social games and traditional gambling could be a dangerous association that would actually negatively impact social casino from a business model perspective providing social casino are subject to gambling regulation and restriction.

Traditional Internet gambling remains a popular past time for many players. However, their player numbers are relatively small compared to social casino players. Growth is difficult and governments continue to move in the direction for more and more regulation resulting in increasing costs to operate an Internet gambling business. Therefore, the Internet gambling  business model is  sustainable for existing businesses and a good model for them despite minimal growth unless new markets such as Brazil or the US open-up.  In this case their may be opportunities for "new" Internet gambling businesses to  also enter the space.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes  about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

1 comment:

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